1. Field of the Invention
The present invention relates to financial securities, and more particularly, to an arrangement in which a collection of principal for a first financial instrument is allocated to a second financial instrument.
2. Description of the Related Art
In an overwhelming majority of asset-backed commercial paper (ABCP) programs that exist today, a 100% liquidity backstop is required by a rating agency to ensure that maturing commercial paper (CP) is repaid on its maturity date to a rated certainty (e.g., A-1+, A-1 or A-2, as applicable). The liquidity backstop is typically provided by a rated bank in the form of an unfunded cash commitment. To the extent that there is a disruption in the CP market and an issuer is unable to fund or refinance maturing ABCP by issuing new ABCP, that is, unable to roll the CP, the issuer will be forced to draw upon the liquidity commitment and use such funds to repay the maturing ABCP. The bank that provides such funding will then become an effective owner of an underlying asset supporting the ABCP program and rely on cash flows from the underlying asset for the repayment of the loan that the bank extended.
A problem for issuers of ABCP is that as the ABCP market has grown, the need for liquidity commitments from banks has grown, dollar for dollar, since these programs typically require $1 of liquidity commitment for every $1 of assets funded. As such, demand for bank-provided liquidity commitments has grown at a dramatically higher rate than supply. As a result, issuers of ABCP have been faced with a scarcity of bank-provided liquidity commitments and, where available, have had to pay significantly higher costs for obtaining these bank-provided liquidity commitments.